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a AmmerCo currently has 65.6 million shares outstanding. If AmmerCo's shares are traing at $56 per share, what is the company's market capitalization (le, value of equity)? Equity value Shares outstanding, millions Times: Share price, $ Equity value, $ million b Assuming the market value of debt equals today's book value of debt, what percentage of the company's value is attributable to debt, and what percentage is attributable to equity? Market value, $ million Proportion of total capital, % Source of capital Debt Equity Total capitalization Using these weights, compute the weighted average cost of capital. Assume the pretax cost of debt is 8 percent, the cost of equity is 12 percent, and the marginal tax rate is 28 percent. + Cost of apital, Marginal tax rate, % After-tax cost of capital, % Contribution to weighted average, % Weight, % Debt Equity WACC 4 1 2 EXHIBIT 1 AmmerCo: Projected Income Statement and Reorganized Balance Sheet 3 $ million S 6 Income statement Today Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 7 Revenues 3,651.2 3,903.1 4,156.8 4,427.0 4,692.7 4,950.7 5,198.3 8 Operating costs (3,136.9) (3,320.7) (3,533.3) (3,763.0) (3,988.8) (4,208.1) (4,418.5) 9 Depreciation (84.2) (98.5) (104.8) (111.6) (118.3) (124.8) (131.0) 10 Operating profits 430.1 483.9 518.8 552.5 585.6 617.9 648.7 11 12 Interest (41.5) (41.6) (41.6) (41.6) (41.6) (41.6) (41.6) 13 Earnings before taxes 388.6 442.3 477.2 510.9 544.0 576.3 607.1 14 15 Taxes (108.8) (123.9) (133.6) (143.1) (152.3) (161.4) (170.0) 16 Net income 279.8 318.5 343.6 367.8 391.7 414.9 437.1 17 18 Accounts payable has been netted against inventory to determine operating working capital 19 20 Operating profit tax rate 28.0% 21 et Year 6 198.3 118.5) 31.0) 48.7 Reorganized balance sheet Operating working capital Property and equipment Invested capital Today 182.6 1,533.5 1,716.1 Year 1 195.2 1,639.3 1,834.5 Year 2 207.8 1,745.9 1,953.7 Year 3 221.4 1,859.4 2,080.7 Year 4 234.6 1,970.9 2,205.5 Year 5 247.5 2,079.3 2,326.9 Year 6 259.9 2.183.3 2.443.2 1.6) 7.1 Debt Shareholders' equity Invested capital 832.0 884.1 1,716.1 832.0 1,002.5 1,834.5 832.0 1,121.7 1,953.7 832.0 1,248.7 2,080.7 832.0 1,373.5 2,205.5 832.0 1,494.9 2,326.9 832.0 1,611.2 2,443.2 .0)

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